Quarterly report pursuant to Section 13 or 15(d)

Convertible Promissory Notes and Other Notes Payable

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Convertible Promissory Notes and Other Notes Payable
6 Months Ended
Sep. 30, 2014
Notes to Financial Statements  
NOTE 7 - Convertible Promissory Notes and Other Notes Payable

The following table summarizes our secured and unsecured promissory notes and other notes payable at September 30, 2014 and March 31, 2014.

 

    September 30, 2014     March 31, 2014  
    Principal     Accrued           Principal     Accrued        
    Balance     Interest     Total     Balance     Interest     Total  
Senior Secured 10% Convertible Promissory Notes                                
    issued to Platinum:                                    
Exchange Note issued on October 11, 2012   $ 1,272,600     $ 280,000     $ 1,552,600     $ 1,272,600     $ 203,400     $ 1,476,000  
Investment Note issued on October 11, 2012     500,000       110,000       610,000       500,000       79,900       579,900  
Investment Note issued on October 19, 2012     500,000       108,700       608,700       500,000       78,600       578,600  
Investment Note issued on February 22, 2013     250,000       43,900       293,900       250,000       29,400       279,400  
Investment Note issued on March 12, 2013     750,000       127,400       877,400       750,000       84,100       834,100  
      3,272,600       670,000       3,942,600       3,272,600       475,400       3,748,000  
                                                 
Convertible promissory note issued on July 26, 2013     250,000       31,600       281,600       250,000       17,700       267,700  
    Total Senior notes     3,522,600       701,600       4,224,200       3,522,600       493,100       4,015,700  
                                                 
Aggregate note discount     -       -       -       (2,085,900 )     -       (2,085,900 )
    Net Senior notes (non-current)   $ 3,522,600     $ 701,600     $ 4,224,200     $ 1,436,700     $ 493,100     $ 1,929,800  
                                                 
                                                 
10% Convertible Promissory Notes (Unit Notes)                                          
2013/2014 Unit Notes, due 7/31/14   $ -     $ -     $ -     $ 1,007,500     $ 35,700     $ 1,043,200  
2014 Unit Notes, including amended notes, due 3/31/15     2,718,400       95,600       2,814,000       50,000       200       50,200  
      2,718,400       95,600       2,814,000       1,057,500       35,900       1,093,400  
 Note discounts     (1,251,000 )     -       (1,251,000 )     (697,400 )     -       (697,400 )
    Net convertible notes (all current)   $ 1,467,400     $ 95,600     $ 1,563,000     $ 360,100     $ 35,900     $ 396,000  
                                                 
                                                 
Notes Payable to unrelated parties:                                                
  7.5% Notes payable to service providers for                                                
  accounts payable converted to notes payable:                                                
     Burr, Pilger, Mayer   $ 90,400     $ 10,200     $ 100,600     $ 90,400     $ 6,800     $ 97,200  
     Desjardins     177,100       20,700       197,800       178,600       14,100       192,700  
     McCarthy Tetrault     362,200       38,600       400,800       360,900       24,800       385,700  
     August 2012 Morrison & Foerster Note A     918,200       139,400       1,057,600       918,200       87,900       1,006,100  
     August 2012 Morrison & Foerster Note B (1)     1,379,400       264,300       1,643,700       1,379,400       195,200       1,574,600  
     University Health Network  (1)     549,500       81,300       630,800       549,500       60,600       610,100  
      3,476,800       554,500       4,031,300       3,477,000       389,400       3,866,400  
        Note discount     (672,700 )     -       (672,700 )     (848,100 )     -       (848,100 )
      2,804,100       554,500       3,358,600       2,628,900       389,400       3,018,300  
 less: current portion     (1,147,100 )     (208,900 )     (1,356,000 )     (1,130,100 )     (133,600 )     (1,263,700 )
     non-current portion and discount   $ 1,657,000     $ 345,600     $ 2,002,600     $ 1,498,800     $ 255,800     $ 1,754,600  
                                                 
5.75% and 10.25% Notes payable to insurance                                          
premium financing company (current)   $ 61,700     $ -     $ 61,700     $ 4,900     $ -     $ 4,900  
                                                 
  10% Notes payable to vendors for accounts                                                
  payable converted to notes payable   $ 415,200     $ 43,000     $ 458,200     $ 119,400     $ 34,700     $ 154,100  
  less: current portion     (415,200 )     (43,000 )     (458,200 )     (119,400 )     (34,700 )     (154,100 )
     non-current portion   $ -     $ -     $ -     $ -     $ -     $ -  
                                                 
  7.0% Note payable (August 2012)   $ 58,800     $ 5,800     $ 64,600     $ 58,800     $ 3,800     $ 62,600  
  less: current portion     (20,000 )     (5,800 )     (25,800 )     (15,800 )     (3,800 )     (19,600 )
  7.0% Notes payable - non-current portion   $ 38,800     $ -     $ 38,800     $ 43,000     $ -     $ 43,000  
                                                 
  Total notes payable to unrelated parties   $ 4,012,500     $ 603,300     $ 4,615,800     $ 3,660,100     $ 427,900     $ 4,088,000  
  less: current portion     (1,644,000 )     (257,700 )     (1,901,700 )     (1,270,200 )     (172,100 )     (1,442,300 )
     non-current portion     2,368,500       345,600       2,714,100       2,389,900       255,800       2,645,700  
  less: discount     (672,700 )     -       (672,700 )     (848,100 )     -       (848,100 )
    $ 1,695,800     $ 345,600     $ 2,041,400     $ 1,541,800     $ 255,800     $ 1,797,600  
                                                 
                                                 
Notes payable to related parties:                                                
  October 2012 7.5% Note to Cato Holding Co.   $ 293,600     $ 43,100     $ 336,700     $ 293,600     $ 30,800     $ 324,400  
  October 2012 7.5% Note to Cato Research Ltd. (1)     1,009,000       160,400       1,169,400       1,009,000       117,300       1,126,300  
      1,302,600       203,500       1,506,100       1,302,600       148,100       1,450,700  
            Note discount     (79,600 )     -       (79,600 )     (103,200 )     -       (103,200 )
     Total notes payable to related parties     1,223,000       203,500       1,426,500       1,199,400       148,100       1,347,500  
  less: current portion     (279,800 )     (43,100 )     (322,900 )     (259,600 )     (30,800 )     (290,400 )
    non-current portion and discount   $ 943,200     $ 160,400     $ 1,103,600     $ 939,800     $ 117,300     $ 1,057,100  

(1) Note and interest payable solely in restricted shares of the Company's common stock.

 

Significant changes in our convertible promissory notes and other promissory notes since March 31, 2014 are described below:

 

Note Conversion and Warrant Amendment Agreement with Platinum

 

On July 18, 2014, we entered into an Amended and Restated Note Conversion Agreement and Warrant Amendment with Platinum  (Amendment), pursuant to which Platinum agreed to convert into our unregistered equity securities all Senior Secured Convertible Promissory Notes (Senior Notes) held by Platinum, in the aggregate amount of approximately $4.2 million at September 30, 2014, including accrued but unpaid interest thereon (Outstanding Balance), upon our consummation on or before August 31, 2014 (Closing Date), of either (i) a private equity financing resulting in aggregate gross proceeds of at least $36.0 million (Private Financing), or (ii) a public offering of our equity securities registered with the SEC resulting in gross proceeds of at least $10.0 million (Public Offering) (the Private Financing and Public Offering are referred to in this discussion as a Platinum Qualified Financing). In August and September 2014, we amended the Amendment to extend the Closing Date until October 31, 2014. Upon consummation of a Private Financing, the Senior Notes will convert into that number of unregistered shares of our common stock equal to the Outstanding Balance on the Closing Date, divided by $10.00 per share. Upon consummation of a Public Offering, the Senior Notes will convert into shares of newly created Series B Convertible Preferred Stock (Series B Preferred) at the lower of $10.00 per share or the lowest per-share price in the Public Offering and having an aggregate liquidation preference equal to the Outstanding Balance on the Closing Date (see Note 8, Capital Stock, regarding Creation of Series B Preferred Stock).

 

Additionally, pursuant to the terms and conditions of the Amendment, in the event we consummate a Platinum Qualified Financing on or before the Closing Date, the exercise price of the Platinum Warrants we have issued to Platinum in connection with the Senior Notes, and warrants that we may still issue pursuant to the Note Exchange and Purchase Agreement between us and Platinum, dated October 11, 2012 (NEPA), if any, will be fixed at the lower of $10.00 per share or the purchase price of common stock sold in the Platinum Qualified Financing. Finally, the anti-dilutive provisions contained in the Platinum Warrants, other than typical adjustments for stock splits, combinations and dividends, will be terminated as of the closing date.

 

Platinum also agreed to terminate the Amended and Restated Security Agreement, Intellectual Property Security and Stock Pledge Agreement and Negative Covenant Agreement, each dated October 11, 2012, related to the Senior Notes and the NEPA, and to release all of its security interests in our assets in connection with our completion of a Platinum Qualified Financing and conversion of the Senior Notes.

 

We determined that the Amendment resulted in a modification of the Senior Notes that should be accounted for as an extinguishment of debt. Considering, among other factors, the cash flows and conversion features of the Senior Notes as modified by the Amendment, market interest rates for debt of similar quality and the relative probabilities of conversion of the Senior Notes into either shares of our common stock or Series B Preferred upon consummation of a Qualified Financing, we determined that the fair values of the Senior Notes at July 18, 2014, aggregating $6,475,000, represented a substantial premium over their aggregate $4,138,700 face values plus accrued interest. In accordance with the provisions of ASC 470-20, Debt with Conversion and Other Options, we recognized the premium in excess of the face value and accrued interest, $2,336,300, as a non-cash component of loss on extinguishment of debt in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss with a credit to additional paid-in capital, an equity account. Consequently, we recorded the liability for the Senior Notes at their face values plus accrued interest. We recognized the difference between the pre-modification carrying values of the notes and their face values, an aggregate of $1,983,700, as an additional non-cash charge to loss on extinguishment of debt in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Loss. Certain of the Senior Notes contained a beneficial conversion feature at the time they were originally issued. We have accounted for the repurchase of the beneficial conversion feature at the time of the modification, an aggregate of $2,716,600, as a reduction to the loss on extinguishment of debt in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss, with a corresponding reduction to additional paid-in capital. The net amount of the loss on extinguishment of debt related to the amendment of the Senior Notes recognized in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss is $1,603,400.

 

10% Convertible Notes Issued in Connection with 2014 Unit Private Placement

 

As described more completely in the section entitled 2014 Unit Private Placement in Note 8, Capital Stock, between late March 2014 and September 30, 2014, we issued to accredited investors 10% convertible notes (the 2014Unit Notes) in the aggregate face amount of $1,775,000, including an aggregate face amount of $750,000 of such notes issued to Platinum and 2014 Unit Notes in the aggregate principal amount of $50,000 issued prior to March 31, 2014, in connection with our private placement offering of Units. (See Note 10, Subsequent Events, for information regarding additional notes issued in connection with the 2014 Unit Private Placement after September 30, 2014.) The 2014 Unit Notes mature on March 31, 2015 (Maturity) and the outstanding principal of the 2014 Unit Notes and their related accrued interest (the Outstanding Balance) is convertible into shares of our common stock at a conversion price of $10.00 per share at or prior to Maturity, at the option of the investor. In addition, upon our consummation of either (i) an equity or equity-based public financing registered with the SEC, or (ii) an equity or equity-based private placement, or series of private placements, not registered with the SEC, in either case resulting in gross cash proceeds to us of at least $10.0 million prior to Maturity (a Qualified Financing), the Outstanding Balance of the 2014 Unit Notes will automatically convert into securities substantially similar to those sold in the Qualified Financing, based on the following formula: (the Outstanding Balance as of the closing of the Qualified Financing) x 1.25 / (the per security price of the securities sold in the Qualified Financing). This automatic conversion feature results in a contingent beneficial conversion feature which will be recorded upon the consummation of a Qualified Financing. Under certain circumstances, the holders of the 2014 Unit Notes may request payment in cash in lieu of automatic conversion into the securities of the Qualified Financing.

 

We allocated the proceeds from the sale of the units to the 2014 Unit Notes, the common stock and the warrants comprising the units based on the relative fair value of the individual securities in the unit on the date of the unit sale. Based on the short-duration of the 2014 Unit Notes and their other terms, we determined that the fair value of the 2014 Unit Notes at the date of issuance was equal to their face value. Accordingly, we recorded an initial discount attributable to each 2014 Unit Note for an amount representing the difference between the face value of the 2014 Unit Note and its allocated relative value. Additionally, the 2014 Unit Notes contain an embedded conversion feature, most of which had an intrinsic value at the issuance date, which value we treated as an additional discount attributable to those 2014 Unit Notes, subject to limitations on the absolute amount of discount attributable to each 2014 Unit Note. We recorded a corresponding credit to additional paid-in capital, an equity account, attributable to the beneficial conversion feature. We amortize the aggregate discount attributable to the 2014 Unit Notes using the effective interest method over the respective term of each 2014 Unit Note.  Based on their respective discounts, the effective interest rates attributable to the 2014 Unit Notes range from 38.7% to 1116.8%, with a weighted average rate of 402.9%.

 

Amendment of 2013/2014 Unit Notes and Warrants

 

Effective May 31, 2014, we entered into note and warrant amendment agreements with substantially all holders of our 2013/2014 Unit Notes and 2013/2014 Unit Warrants, each of whom agreed to (i) modify certain terms of their 2013/2014 Unit Note to conform to the corresponding terms of the 2014 Unit Notes, including an extension of the maturity date of their 2013/2014 Unit Note from July 30, 2014 to March 31, 2015, as well as adoption of the automatic conversion and 25% conversion premium features related to consummation of a Qualified Financing, as described above (Amended 2013 Unit Notes), and (ii) modify certain terms of their 2013/2014 Unit Warrants, including the exercise price and expiration date, to conform to the corresponding terms of the 2014 Unit Warrants (Amended 2013 Unit Warrants). Holders of 2013/2014 Unit Notes having an aggregate initial face amount of $895,000 agreed to such amendments. The maturity date of 2013/2014 Unit Notes payable to holders who did not agree to amend their 2013/2014 Unit Note and 2013/2014 Unit Warrant remained July 30, 2014 and the $20.00 per share exercise price and July 30, 2016 expiration date of the 2013/2014 Unit Warrants held by such holders remains unchanged. Between April 1, 2014 and August 15, 2014, we repaid 2013/2014 Unit Notes having an initial face value of $ 112,500.

 

We determined that the modification of the 2013/2014 Unit Notes and the 2013/2014 Unit Warrants should be accounted for as an extinguishment of debt. Considering the cash flows and the non-contingent and contingent beneficial conversion features of the Amended 2013 Notes and other factors, including market interest rates for unsecured debt of similar quality and the probability of their conversion to securities in a Qualified Financing, we determined that the fair values of the Amended 2013 Unit Notes, aggregating $1,394,000, represented a substantial premium over their aggregate $943,400 face values. In accordance with the provisions of ASC 470-20, Debt with Conversion and Other Options, we recognized the premium in excess of the face value, $450,600, as a credit to additional paid-in capital, an equity account. Consequently, we recorded the liability for the Amended 2013 Unit Notes at their face values. We recognized the difference between the pre-modification carrying values of the notes and their fair values, an aggregate of $867,500, as a non-cash charge to loss on extinguishment of debt in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Loss.  As described in greater detail in Note 8, Capital Stock, we determined the incremental fair value of the Amended 2013 Unit Warrants, which are treated as equity instruments, to be $272,900. We recognized this incremental fair value as an additional component of loss on extinguishment of debt in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss and as a credit to additional paid-in capital.  Certain of the 2013/2014 Unit Notes contained a beneficial conversion feature when they were originally issued. We have accounted for the repurchase of the beneficial conversion feature at the time of the modification, an aggregate of $614,200, as a reduction to the loss on extinguishment of debt in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss, with a corresponding reduction to additional paid-in capital. The net amount of the loss on extinguishment of debt related to the Amended 2013 Unit Notes and Amended 2013 Unit Warrants recognized in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss is $526,200. Since the Amended 2013 Unit Notes have the same features and maturity as the 2014 Unit Notes, the two sets of notes are aggregated in the summary table above.  At September 30, 2014, no unamended 2013/2014 Unit Notes remain outstanding.

 

Extension of McCarthy Tetrault Note Maturity Date

 

On June 11, 2014, we agreed with McCarthy Tetrault, our legal counsel in Ontario, Canada (McCarthy), to extend the maturity date of our promissory note payable to McCarthy from June 14, 2014 to the earlier of (i) September 30, 2014, (ii) consummation of a financing in which we receive gross cash proceeds of at least $15.0 million, or (iii) consummation of a change of control of the Company, as defined in the McCarthy note.  McCarthy also agreed to forbear with respect to the requirement that we make monthly payments on the McCarthy note from the date of the agreement until maturity and granted us a waiver with respect to previously missed monthly payments. At September 30, 2014, the McCarthy note remained outstanding.

 

Interest on Notes Payable to be Repaid upon Exercise of Warrants

 

Between August 2012 and October 2012, we issued to Morrison & Foerster, LLP, our intellectual property counsel (M&F), Cato Research Ltd., our contract research organization for development of AV-101 (CRL), and University Health Network, our long-term stem cell research collaborator (UHN), certain unsecured promissory notes and related warrants.  The respective notes are payable solely in restricted shares of our common stock pursuant to M&F’s, CRL’s, and UHN’s surrender from time to time of all or a portion of the principal and interest balance due on their respective notes in connection with their concurrent exercise of their respective warrant.  Between March 31, 2014 and September 30, 2014 we adjusted the M&F warrant, the CRL warrant and the UHN warrant to increase the number of restricted shares available for purchase by 3,459 shares, 2,152 shares and 1,034 shares, respectively, based on interest accrued on the underlying notes through September 30, 2014.  We have recorded the fair value of the additional warrant shares, an aggregate of $29,900, as a charge to interest expense and a corresponding credit to additional paid-in capital.